What is 'chained CPI' and why are liberals so mad it's in Obama's budget?

KeithWagstaff

Robert Reich — former secretary of labor, and a fine illustrator to boot — explains the concept of chained CPI. YouTube

April 5, 2013

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It was reported on Friday that the White House would send a budget to Congress next week with proposed cuts to Medicare and Social Security, the latest effort by President Obama to reach a so-called grand bargain with Republicans to put the U.S.'s fiscal house in order. One proposal in particular has liberals all worked up, and it revolves around a seemingly innocuous bit of wonk-speak: Chained CPI. Here, a guide to chained CPI and why Democrats don't like it:

What is chained CPI?The government uses the consumer price index (CPI) to measure inflation. According to the Department of Labor, the CPI measures how much the cost of a "market basket of consumer goods" changes over time. That basket includes things like housing, food, clothing, etc.

Chained CPI also tracks changes in the cost of living, but takes into account that consumers might change their preferences due to changing prices. So, for example, if the price of beef goes up and pork goes down, chained CPI assumes you would buy less beef and more pork. As a result, it has the effect of measuring a lower rise in costs.

Why don't liberals like chained CPI?Obama's budget proposal reportedly ties Social Security benefits to chained CPI instead of regular CPI. Paul Krugman of the New York Times says that's bad news for seniors:

First of all, there is no reason to believe that the chained index is a better measure of inflation facing seniors than the standard CPI. It’s true that the standard measure arguably understates inflation for the typical household — but seniors have a different consumption basket from the young, one that includes more medical expenses, and probably face true inflation that’s higher, not lower, than the official measure. [New York Times]

In Krugman's view, this "is, purely and simply, a benefit cut." CNNMoney reports that adopting chained CPI for Social Security would mean that "by 2030, the median payment would be 3 percent less than it would be if today's inflation measure were used," reducing spending by $216 billion over the next 10 years.

In response, Sen. Bernie Sanders, the liberal Independent from Vermont, issued a statement saying millions of people "will be extremely disappointed if President Obama caves into the long standing Republican effort to cut Social Security and benefits for disabled veterans and their survivors through a so-called chained CPI." The AARP even developed a calculator to show seniors how much the switch would cost them in benefits.

"Why are Democrats even suggesting the inflation adjustment be reduced?" asks Robert Reich, former secretary of labor under President Clinton, at The Huffington Post. "Republicans aren't asking for it. Not even Paul Ryan's draconian budget includes it."

Reich is gracious enough to explain his objections in video form:

Ezra Klein and Evan Soltas of the Washington Post argue that liberals shouldn't get too worried because Republicans will reject the budget anyway, letting Obama claim that nobody "can say he isn’t trying to reach a deal, and the cries from liberals will prove that he's forcing his base to accept very tough medicine." Indeed, Speaker John Boehner (R-Ohio) later in the day dismissed Obama's proposals as too "modest" to justify tax increases.

In other words, expect to hear a lot more about chained CPI in the future.